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Developing Agricultural Investment
Opportunities in Northern Ghana
Certified Seed Production
April 2016 – Final
2
Purpose of This Document
This document outlines the salient features of an investment opportunity in a certified seed
producer located in Northern Ghana
Objectives
To present a greenfield investment opportunity for a grain certified seed producer in Northern
Ghana outlining:
– The business environment in Ghana
– The market potential of the certified seed sector
– A suitable business model for certified seed production
– The opportunity’s investment requirements and financial projections
– Systemic, business model and financial constraints the opportunity is susceptible to and
potential mitigations for these constraints
Intended
Audience
Market Development Programme for Northern Ghana (MADE) Team
Regional and international investors who are looking for strategic or financial agribusiness
investments in Sub-Saharan Africa (SSA)
Agricultural private sector role players in Ghana
Opportunity
Description
An opportunity exists to start a 280 metric ton (MT) certified seed producer (rice, maize,
sorghum, groundnut, soya, cowpea) for a Ghana Cedi (GHS) 1 million (m) investment in
land rental, production equipment, vehicles and working capital
In the form of 20% debt and 80% equity, it has the potential to generate an internal rate of
return (IRR) of 33% and pay back the investment within four years
Contents
Executive Summary
Doing Business in Ghana
Market Opportunity
Business Model
Financial Analysis
Constraints and Mitigations
Appendix
4
Executive Summary (1 of 2)
A good business environment in Ghana makes it easier to take advantage of the investment
opportunity for improved seeds with the appropriate business model applied
Doing
Business
in Ghana
Ghana’s economy ranks among the top four largest economies in West Africa alongside Nigeria, Cameroon and
Cote d’Ivoire and is SSA’s 7th largest economy
Favourable macroeconomic conditions and the highest Ease of Doing Business ranking amongst its peers in the
Economic Community of West African States (ECOWAS) positions Ghana well as an ideal investment destination
in the region
Where investors are able to overcome infrastructural and interest rate constraints, opportunities in Ghana flourish
due to the stable operating environment
The agricultural sector remains the largest employer in the economy imbuing it with a significant role in overall
economic development; therefore various government policies have been developed to support it
Market
Opportunity
An overall supply gap of 44 639 MT of improved seeds worth approximately United States Dollar (USD) 63.8m
exists in Ghana based on the low levels of current improved seed cultivation and low yields
Despite the large market gap, existing seed cultivation companies produce conservatively in response to systemic
constraints, a small scale of 278 MT has therefore been selected
Provided that existing demand can be captured, strong margins and the potential to be one of the largest seed
producers nationally make this opportunity an attractive prospect
Business
Model
Improved seeds provide the potential for larger, higher quality and more consistent yields to various farmer
segments and institutional buyers
Customer segments are served through seed production, seed processing, the leasing of production equipment
and the provision of extension services
Other key activities include demand generation and out-grower scheme management
Key resource requirements include the use of agronomy specialists for quality control, land, farming equipment,
access to a reliable power supply and certification for seed production
Seed sales account for the vast majority of revenue generation, with costs driven predominantly by production,
operating expenses, out-grower management and demand generation
Executive Summary
Sources: Monitor Deloitte Analysis; Multiple, cited throughout the document
5
With an IRR of 33%, the investment opportunity is likely to generate solid returns provided
that the constraints identified can be effectively mitigated
Financial
Analysis
A total investment requirement of GHS 942 157 is expected to generate a net present value (NPV) of GHS 355
198 over the five year period with an IRR of 33% and a payback period of 4 years
Earnings before interest, tax, depreciation and amortisation (EBITDA) remains flat during the period despite 17%
revenue growth due to similar cost and revenue growth rates; cash generated is expected to cover working capital
requirements
Despite expected losses in Year 0, net margins remain relatively stable over the period offering healthy after tax
returns of 33%
Constraints
and
Mitigation
Low improved seed adoption driven by poor agronomic practices, amongst other factors, can be mitigated by
targeted market development activities and strategic partnerships
Operational inefficiencies at Savannah Agricultural Research Institute (SARI) and Grains and Legume
Development Board (GLDB) result in constrained supply, however this can be effectively mitigated through
strategic partnerships with alternative organisations
Extensive market development costs and high costs associated with aggregating supply from seed growers can be
mitigated by targeted marketing activities and block farms
The high cost of local debt and working capital constraints can be mitigated by obtaining alternative funding
sources and employing sound financial management techniques
Executive Summary (2 of 2)
Sources: Monitor Deloitte Analysis; Multiple, cited throughout the document
Executive Summary
Contents
Executive Summary
Doing Business in Ghana
Market Opportunity
Business Model
Financial Analysis
Constraints and Mitigations
Appendix
7
Ghana’s economy ranks among the top four largest economies in West Africa alongside
Nigeria, Cameroon and Cote d’Ivoire and is the 7th largest economy in sub-Saharan Africa
Doing Business in Ghana
Cote d’Ivoire
GDP1 $ 34 bn
GDP per capita1 $ 1545
ODA2% GNI3 4.2%
Competitiveness 91/140
SSA Rank (GDP) 8/47
Niger Mauritania
Mali
Nigeria
Chad
Liberia
Sierra Leone
Burkina
Gambia
Senegal
Guinea Bissau Benin
GHANA
Cote
d’Ivoire
Guinea
Cameroon
Togo
Country Comparative
Senegal
GDP*1 $ 15 bn**
GDP per capita1 $ 1067
ODA2% GNI3 6.7%
Competitiveness 110/140
SSA Rank (GDP) 16/47
Mali
GDP1 $ 12 bn
GDP per capita1 $ 705
ODA2% GNI3 13.5%
Competitiveness 127/140
SSA Rank (GDP) 25/47
Nigeria
GDP1 $ 568 bn
GDP per capita1 $ 3203
ODA2% GNI3 0.5%
Competitiveness 124/140
SSA Rank (GDP) 1/47
Cameroon
GDP1 $ 32 bn
GDP per capita1 $ 1275
ODA2% GNI3 2.5%
Competitiveness 114/140
SSA Rank (GDP) 10/47
Burkina Faso
GDP1 $ 12 bn
GDP per capita1 $ 713
ODA2% GNI3 8.7%
Competitiveness NA
SSA Rank (GDP) 24/47
Ghana
GDP1 $ 38 bn
GDP per capita1 $ 1441
ODA2% GNI3 2.9%
Competitiveness 119/140
SSA Rank (GDP) 7/47
Largest Economies in West Africa
Note: *Gross Domestic Product (GDP); ** billion (bn); ¹GDP and GDP per Capita at current prices (USD dollars), 2Overseas Development Assistance
(ODA), 3Gross National Income (GNI). Sources: World Economic Forum (WEF) Competitiveness Report 2015; World Bank (WB) Doing Business
Report 2015; WB Development Indicators 2015; Monitor Deloitte Analysis
8
0
5
10
15
20
2525
10
5
0
15
20 17
2011 2006
11
6,4
2008 2012
7,3
2004
12 10
4,3
2005
11
5,9
14,0
2007
13
18
9,3 9,1
5,6 4,0
20
2014 2013
+7% 20
4,8
2009
7,9
2010
15 14
Ghana’s steady GDP growth and rising per capita income has contributed to increased
buying power and a shift in consumer preferences towards premium tier goods and services
Ghana’s Economic Landscape
Doing Business in Ghana
764752718673
605575563529520502486
800
0
600
400
200
+5%
2013 2012 2008 2007 2009 2010 2011 2006 2014 2005 2004
Ghana GDP (USD¹ Billions) and Growth, 2004-2014
GDP GDP Growth Rate (%)
Notes
Ghana has experienced
steady 7% growth in GDP
over last decade
Declines in growth rates in
recent years can largely be
attributed to the impact of
the decline in commodity
prices, predominantly gold
and cocoa
Nonetheless, incomes have
been rising throughout the
period providing a
burgeoning middle class
with newfound buying power
The increased income levels
have led to a change in
consumer preferences in
favour of premium tier,
higher quality goods and
services
CAGR¹
CAGR1
GDP at 2005 Constant Prices
GDP Per Capita at 2005 Constant Prices
Ghana GDP Per Capita, 2004-2014
Note: 1Compound Annual Growth Rate
Sources: Monitor Deloitte Analysis; World Bank Economic Indicators 2016; World Economic Outlook Database; World Bank Forecasts and Analysis,
MADE Market Diagnostics, 2014
9
Despite its declining share of GDP, the agricultural sector remains the largest employer in the
economy imbuing it with a significant role in overall economic development
Agricultural Sector
Doing Business in Ghana
Notes
Agriculture’s share of GDP
has been steadily declining
over the period 2004-2014
Contrary to the 7% growth
rate of GDP over the period,
the agricultural sector has
contracted by 6%,
predominantly driven by the
economy’s structural shift
towards a more advanced
economy
Despite this structural shift,
the agricultural sector has
remained the largest
employer
The sector is characterised
by a large amount of
smallholder farmers
producing on a small to
medium scale
Employment Distribution by Sector, 2006-2013
GDP Distribution by Sector, 2004-2014
Employment Distribution by Sector, 2006-2013
41% 31% 30% 32% 33% 31% 26% 24%
27%21% 21% 21% 20% 20% 26% 29% 29%
49% 47% 49% 48% 47% 48%
23%42%
22%
27%
28%
48% 47%31%
50%32%
11
2005
100 39
2014
42
2013
48
2012 2010
32
2011
40
2009
26
2008
30
2006
25
2007 2004
20
Agriculture Services Industry
57%42% 45%
14%
15% 14%
29%43% 41%
100
2010
100
2006
100
2013
Services
Industry
Agriculture
GDP Distribution by Sector, Percent (2004-2014)
Sources: Monitor Deloitte Analysis; World Bank Economic Indicators 2016; World Economic Outlook Database; World Bank Forecasts and Analysis
10
Sources: Monitor Deloitte Analysis; Government of Ghana; Ghana Investment Promotion Commission
Agriculture Sector Policy Support
In recognition of the importance of agriculture, the Government of Ghana has developed a
set of policies intended to foster growth and development in the agricultural sector
Doing Business in Ghana
Policy Summary
Despite the agriculture sector’s declining contribution to GDP over the past decade, the Government of Ghana (GoG)
recognises the sector’s role in achieving sustained economic growth and development in the country,
Various policy objectives and investment incentives exist to foster agricultural led growth, many of which are geared
towards attracting private sector investment in the sector
Food and Agriculture Sector
Development Policy I and II
Policy Objectives
Increasing growth in incomes
Improving competitiveness of sector and
better integrating it into domestic and
international markets
Promoting science and technology in food and
agriculture development
Private Sector Development
Strategy Improving the productivity and efficiency of
Ghana’s economy and building a thriving
private sector
Increasing rural incomes by 20%, particularly
in Northern and central Ghana, through more
productive and efficient agriculture
Agro-Processing
5-year tax holiday from the establishment of
the business and a 3-year corporate tax
freeze
50% tax rebates for agro-processing and
manufacturing industries located in regional
capitals and districts outside of Accra
Investment Incentives
Production
Custom duty exemptions on imports of
agricultural plant, machinery and equipment
5-10 year tax holidays on cash crop
production
Income tax exemptions for select farming
activities and ~90% corporate tax
exemptions for farmers outside of Accra
11
Ranked 114, Ghana has the most favourable Ease of
Doing Business score amongst its peers in ECOWAS
The ranking remains middle tier due to issues concerning
contract enforceability, access to electricity and
international trade
Favourable macroeconomic conditions and the highest ease of doing business ranking in
ECOWAS positions Ghana well as an ideal investment destination in the region
Ease of Doing Business Ranking, 2014 ECOWAS FDI Net Inflows (USD Billions), 2014
Niger Mauritania
Mali
Nigeria
Chad
Liberia
Sierra Leone
Burkina Gambia
Senegal
Guinea Bissau Benin
GHANA
Cote
d’Ivoire
Guinea
Cameroon
Togo
Ranking¹ 0 – 38 39 - 76 77 – 114 115 – 152 153 - 183
0,02
0,18
0,03
Gu
inea
-Bis
sau
To
go
Gam
bia
0,19
Mali
Ben
in
Co
te
d’Iv
oir
e
Sie
rra
Leo
ne
0,34
Bu
rkin
a
Faso
Lib
eri
a
0,46
Sen
eg
al
4,70
0,34 0,36 0,38
0,69
Gh
an
a
Nig
eri
a
3,40
Stable GDP growth, rising incomes and a good ease of
doing business score all contribute to Ghana being the
second largest attractor of foreign direct investment (FDI)
among ECOWAS member states
The amount of FDI Ghana is able to attract is particularly
significant considering the size of Ghana’s economy vis-
à-vis that of Nigeria
Net FDI Inflows at Current Prices
Ease of Doing Business and FDI
Doing Business in Ghana
Notes: ¹183 countries, globally, are ranked according to the relative favourability of their business environments.
Sources: Monitor Deloitte Analysis; World Bank Ease of Doing Business Study, World Bank Development Indicators, 2016
12
Political
and Legal
• Ghana is a relatively peaceful and stable country owing to:
- A track record of largely free and fair elections
- A strong constitutional framework
- A history of broad policy continuity
Economic
• The country has a high prime lending rate driven by large budget deficits and a central bank with
limited autonomy when it comes to monetary policy setting and implementation
• Despite these structural weaknesses, local oil production is likely to reduce the risks of macroeconomic
instability (due to reliance of oil imports) and provide a substantial boost to growth over the long term
through associated export and fiscal revenues
Social
• With rising incomes, demand for premium and processed food is increasing
• If supply does not increase at the same pace, an increase in imports is likely
• It is challenging to process food within Ghana due to deficient transport links and power constraints,
particularly in rural areas
Technological
• Though agricultural production remains highly labour intensive, GoG realises the need to drive
agricultural productivity and growth through mechanised production
• To this end the government has established agricultural mechanisation service centres nationally and
distributed combined harvesters and tractors to SHFs
• Ghana has relatively fast internet connectivity due to its connection to the high speed SEACOM cable
Agricultural
Investment
Incentives
• Various policy objectives and investment incentives exist to foster growth of the sector and to attract
private sector investment to industries in the sector
• Incentives include three to ten year tax holiday’s, specific tax exemptions and significant rebates and
subsidies on machinery in key product sectors
Operating Environment Assessment
Where investors are able to overcome infrastructural and interest rate constraints,
opportunities in Ghana flourish due to the overall stable operating environment
Doing Business in Ghana
Operating Environment Assessment
Sources: Monitor Deloitte Analysis; Economist Intelligence Unit; Business Monitor International
Contents
Executive Summary
Doing Business in Ghana
Market Opportunity
Business Model
Financial Analysis
Constraints and Mitigations
Appendix
14
Demand for improved seeds in Ghana is driven by a desire to close the significant gap
between current average vs achievable yields prevalent across the entire agricultural sector
Demand Dynamics
Demand for improved seeds is predominantly driven by the desire to increase yields
Agricultural yields are very low across all product segments selected for this opportunity, with maize and rice possessing
significant achievable yield gaps
Yield improvements are achieved through a combination of improved seeds and seed use, appropriate agrochemical use
and good agronomic practices (GAP)
This opportunity focuses on the production and sale of improved seeds
Average Yield vs Achievable Yield (MT/Hectare)
2 21212
6
0
50
60
40
30
20
0
4
10 70
10
8
2
4
50,0%
Soybean Cowpea
65,2%
Rice
9
36,9%
Groundnut Sorghum
3 4
60,0%
8
Maize
28,3%
65,0%
4
Achievable Yield Average Yield % Achieved
Demand Dynamics
Market Opportunity
Sources: Monitor Deloitte Analysis; “Impact Investing In Ghana: Opportunities, Prospects And Challenges”, GIMPA 2013; “Agribusiness Indicators:
Ghana” – World Bank, 2012; “Analysis of the Seed System in Ghana”, Etwire, 2013; FAO Ghana Country Stats, 2011; “Ghana’s Commercial Seed
Sector” – IFPRI
15
An overall market gap of 44 639 MT of improved seeds worth approximately USD 63.8m
exists in Ghana based on the low levels of current improved seed cultivation and low yields
Supply Dynamics
Currently a total of 5 241 MT of improved seeds are produced in the product segments selected for this opportunity
When converted to area cultivated utilising seeding rates (kilogram/hectare) and assuming all the seeds produced are
used for the purposes of cultivation, the 5 241 MT represents 290 158 hectare (ha) of cultivation or 14% of the total area
currently cultivated
If 100% of the land currently cultivating these products utilised improved seeds, a production quantity of 49 880 MT of
improved seeds would be required
The difference of 44 639 MT at a weighted average cost per ton of USD 1 429 represents a USD 63.8m market opportunity
Total Area Cultivated vs Improved Seed Cultivation (Ha - Thousands)
Supply Dynamics and Market Gap
Market Opportunity
Cowpea
-99%
-100%
1
Rice Soybean
197
0
182
243
Sorghum
-76%
47
Groundnut
0
357
237
5
1 023
-77%
86
-97%
-100%
Maize
Improved Seeds Cultivation Total Area Cultivated
Sources: Monitor Deloitte Analysis; “Impact Investing In Ghana: Opportunities, Prospects And Challenges”, GIMPA 2013; “Agribusiness Indicators:
Ghana” – World Bank, 2012; “Analysis of the Seed System in Ghana”, Etwire, 2013; FAO Ghana Country Stats, 2011; “Ghana’s Commercial Seed
Sector” – IFPRI
16
Despite the large market gap, existing seed cultivation companies produce conservatively in
response to systemic constraints, a small scale of 278 MT has therefore been selected
Opportunity Scale
Market Opportunity
Identified
Demand
A total market gap of 44 639 MT
has been identified
The gap is partially attributable to
low adoption rates, which are in
turn driven by perceptions of cost
effectiveness
Despite the large potential market
gap, the low adoption rate requires
extensive demand generation
activities to capture a large share
Economies of
Scale
Every GHS 1m invested in land,
machinery and equipment has a
potential achievable yield of 450 MT
per 270 acres cultivated
A 1 acre SHF farmer is currently
able to produce approximately 1.03
MT of seed
At full out-grower production, this
results in managing 180 SHFs
(assuming 1.5 acres per SHF)
Complexity
Increasing scale requires adding
additional smallholder farmers to
out-grower scheme
A complex out-grower management
model would be required for a scale
greater than 1000 SHFs, i.e., 1030
MT of production
Drivers of Scale
Market Structure
Existing seed businesses produce
between 120 and 300 MT in
response to systemic constraints
These constraints include breeder
seed supply constraints and
perceived demand
A GHS 1m investment at an output of 278 MT has therefore been selected for this opportunity to minimise business
complexity and facilitate the management of systemic constraints
Sources: Monitor Deloitte Analysis; Stakeholder Interviews 2016; “Impact Investing In Ghana: Opportunities, Prospects And Challenges”, GIMPA
2013; “Agribusiness Indicators: Ghana” – World Bank, 2012; “Analysis of the Seed System in Ghana”, Etwire, 2013; FAO Ghana Country Stats, 2011;
“Ghana’s Commercial Seed Sector” – IFPRI
17
Attractive
Key Criteria Rating Rationale
Overall Market
Potential
• The improved seeds market displays relatively large market potential, however
accessing the market requires targeted demand generation activities to change
perceptions pertaining to costs
Potential Margins • The opportunity has the potential to generate healthy margins with gross margins
at 66% and net margins at 33%
Potential Competitive
Advantage
• Should demand generation activities prove successful and the business is able to
increase scale, it will become one of the largest producers nationally with the
potential to secure exclusivity agreements on the back of production volume
Incentives • No tax or production incentives exist to attract investment into seed production,
however, Ministry of Food and Agriculture (MoFA) offers subsidised processing
equipment to stimulate production
Policy Support
• The Plants and Fertilizer Act 803 of 2010 allows private sector to produce their
own foundation seed for certified seed production, however, it provides no
indication of whether intellectual property (IP) relating to development of new
varieties can be protected
Barriers to Entry • Entry barriers are relatively low as the market is unorganised and fragmented,
however certified seed producers need to be registered and approved by the Plant
Protection and Regulatory Services Department (PPRSD)
Provided that existing demand can be captured, strong margins and the potential to be one
of the largest seed producers nationally make this opportunity an attractive prospect
Opportunity Attractiveness
Market Opportunity
Opportunity Attractiveness
Legend Unattractive
Sources: Monitor Deloitte Analysis
Contents
Executive Summary
Doing Business in Ghana
Market Opportunity
Business Model
Financial Analysis
Constraints and Mitigations
Appendix